Legal news and management tips for emerging and mid-sized businesses.

In a Partnership? Your Liability Might Last Longer Than You Think It Does

Partners in Texas partnerships beware! In a recent opinion, the Texas Supreme Court held that the limitations period against a partner, individually, generally does not start until after the final judgment against the partnership is entered.

What that means to you: If you’re a partner in a general partnership and you haven’t been personally named in a lawsuit against the partnership, you can no longer sleep easy once the limitations period on the claim against the partnership has run.

In the case considered by the supreme court, the underlying lawsuit involved a breach of contract claim against the partnership. After over ten years of litigating the breach-of-contract claim, the partnership was found in breach and the plaintiff was awarded around $228,000. When the plaintiff tried to collect, it learned that the partnership did not have the assets to pay the judgment. The plaintiff then sued the partners individually to collect on the judgment.

To make a long story short, after four-and-a-half more years of litigation, the supreme court, recognizing that under Texas law a partner’s liability is derivative of and contingent upon the partnership’s, held that a partner’s liability does not begin until 90-days after the judgment has been rendered against the partnership. And, in the case before the court, because the underlying claim was for breach of contract, which has a four-year statute of limitations, and the plaintiff filed suit against the partners individually within four years of the judgment against the partnership, the suit was timely.

Some important take aways for you (& your counsel):

1)Litigation is time consuming & expensive. While the case referenced above took longer than average time to resolve, it’s not uncommon for commercial litigation lawsuits to linger for two-to-four years before reaching resolution at trial. And, after that you may face an appellate process of up to two more years (or more if you go all the way up to the Texas Supreme Court). Don’t be afraid to litigate when you have to, but if you can find a way to work out your differences outside of the courtroom, you should try to do so.;

2) Seriously consider transforming your existing partnership into an entity with a greater degree of liability protection (such as corporation or limited liability company); and

3) If you insist on keeping the partnership form, even though your partners likely already have a duty to keep you informed , make sure that your partnership agreement requires each partner to alert the others to any litigation involving the partnership.

NOTE: There may be some legal maneuvering room for you, but it would be a technical legal argument related to claims with express events triggering limitations (and not the “accrual” language in this case).[1]

Keep in mind that the court’s decision does not alter a plaintiff’s ability to name partners individually in the initial lawsuit against the partnership. But the decision recognizes a plaintiff’s right to wait and defer the extra cost of bringing suit against the partners until after the plaintiff has determined the partnership is unable to satisfy the claim.

[1] The court analyzed the meaning of the word “accrues” and noted that the applicable statute did not specify when accrual occurs; therefore, if you are dealing with one of the statutes of limitations that expressly defines when accrual occurs–such as actions for asbestos-related or silica-related injuries, claims for failure to return an execution, construction-improvement claims, trade secret misappropriation claims, claims against surveyors, or product liability claims–you may be able to distinguish your case or more successfully argue that the limitations period has run.

Constance Hall, an experienced legal, marketing and client relationship professional, is licensed to practice law in Texas. For more information, if you have questions, or to contact Connie, email her at info@mytxgc.com.